Karnataka High Court questions ED’s belated FEMA proceedings against Cafe Coffee Day CEO Malavika Hegde

The Karnataka High Court on Tuesday took exception to the Enforcement Directorate (ED) initiating proceedings under the Foreign Exchange Management Act, 1999 (FEMA) against Cafe Coffee Day CEO Malavika Hegde after a delay of more that 12 years in connection with a 2010 transaction.

Justice KS Hemalekha asked ED whether proceedings could be initiated after such a long lapse of time.

“You cannot do something after so many years,” the Court orally observed.

Hegde is the widow of late VG Siddhartha, the founder of Cafe Coffee Day.

The Court was hearing he petition challenging the show-cause notice and subsequent hearing notices issued by the FEMA adjudicating authority.

The High Court had earlier, on January 19, stayed the proceedings initiated by the ED under FEMA against Malavika Hegde.

During the hearing on Tuesday, the Court questioned the applicability of Section 43 of FEMA, which deals with the continuation of certain rights and obligations arising under Section 13 even after the death or insolvency of the person liable.

The Court observed that while Section 43 provides for the devolution of certain rights and obligations upon legal representatives, the issue was whether such proceedings could be initiated after an unreasonable period of time.

“What is reasonable is reasonable for all acts. It shall not be an unreasonable delay,” the Court remarked.

The Bench also sought to know when Siddhartha had died and when the notice had been issued.

Appearing for the ED, Special Public Prosecutor Madhu Rao submitted that certain transactions had taken place in 2010 and that foreign exchange had allegedly been utilized for the purchase of shares of companies, which according to the agency amounted to a violation of Section 6(3)(b) of FEMA.

Rao submitted that proceedings had been initiated under FEMA for recovery and imposition of penalty in relation to the alleged violations.

It was argued that Section 43 of FEMA enables the authorities to proceed against the legal heirs in respect of liabilities arising from the transactions.

He further submitted that FEMA does not prescribe a specific limitation period for such proceedings and that identifying and examining transactions of this nature could take considerable time.

He also submitted that in a similar matter, a coordinate bench had dealt with the question of jurisdiction and had directed the party to approach the competent authority.

Appearing for Hegde, advocate Shristi argued that the proceedings had been initiated nearly 12 years after the transactions and after Siddhartha's death.

She submitted that there was another petition filed by the company and that Hegde had approached the High Court in her capacity as the legal heir of the erstwhile director.

“I am now being asked to defend his vicarious liability. I have no personal knowledge. He is dead and departed,” the counsel submitted.

It was further argued that although the show-cause notice was dated 2022, Hegde received it only in 2026 and was now being called upon to personally answer for alleged acts attributed to a person who had died years earlier.

Shristi also distinguished the present case from a situation involving direct liability under FEMA.

“This is not a case where there is direct liability. This is a case of vicarious liability,” the counsel submitted, contending that Siddhartha had not been proceeded against in his capacity as the company itself.

It was argued that Section 43 would therefore have to be examined carefully to determine whether it could be invoked to fasten vicarious liability upon a legal heir.

It was also submitted that Section 43 refers to liability under Section 13 and that such liability would arise after adjudication.

The Bench, however, pointed out that the proceedings at the present stage concerned only a show-cause notice.

“This is just a show-cause notice. Adjudication has to be answered in a manner known to law,” the Court observed.

The Bench said the adjudication would have to determine whether any liability could ultimately be fastened on Hegde, including any alleged liability as the legal heir of a deceased director.

Hegde's counsel relied upon a Supreme Court decision concerning FEMA proceedings involving Citibank, arguing that the issue of jurisdiction could be examined at the threshold.

She also submitted that where proceedings are initiated after an excessive lapse of time, the jurisdictional issue assumes significance and referred to the Supreme Court decision in support of the challenge to the show-cause notice.

The ED sought three weeks to file its objections.

The High Court permitted the same and posted the matter for further hearing on November 4. 

The Court also extended the interim order passed earlier in favour of Hegde.